SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from --------------- to -------------------
Commission File No. 0-6729
FIRST MONTAUK FINANCIAL CORP
(Exact name of registrant as specified in its charter)
New Jersey 22-1737915
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Parkway 109 Office Center, 328 Newman Springs Rd., Red Bank, NJ 07701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 842-4700
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the Registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
- -------------------------------------
10,076,926 Common Shares, no par value, were outstanding as of August 16,
2004.
Page 1 of 25
02
FIRST MONTAUK FINANCIAL CORP.
FORM 10-Q
JUNE 30, 2004
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of June 30, 2004 and December 31, 2003.................. 3
Consolidated Statements of Income (Loss) for the Six Months
and Three months Ended June 30, 2004 and 2003............... 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2004 and 2003 ................... 5
Notes to Consolidated Financial Statements ................ 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 11-16
Item 3. Risk Management........................................ 16
Item 4. Controls and Procedures................................ 17
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings..................................... 18
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities........................ 18
Item 3. Defaults Upon Senior Securities....................... 19
Item 4. Submission of Matters to a Vote of Securities Holders. 19
Item 5. Other Information..................................... 19
Item 6. Exhibits and Reports on Form 8-K...................... 20
Signatures .................................................... 21
Officers' Certifications.......................................22-25
03
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
2004 2003
(unaudited)
ASSETS
Cash and cash equivalents $ 2,066,319 $ 3,441,743
Due from clearing firm 4,916,596 5,219,267
Securities owned, at market value 425,435 169,534
Employee and broker receivables 713,764 1,052,317
Property and equipment - net 915,602 1,052,564
Other assets 2,024,043 1,661,351
-------------------- --------------------
Total Assets $ 11,061,759 $ 12,596,776
==================== ====================
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
Deferred income $ 5,542,620 $ 5,980,124
6% convertible debentures 3,135,000 3,135,000
Warrants subject to put options 517,565 479,066
Securities sold, not yet purchased, at market value 281,309 69,330
Commissions payable 2,399,739 4,077,803
Accounts payable 1,321,522 980,483
Accrued expenses 1,456,426 1,803,973
Capital leases payable 30,880 122,733
Other liabilities 18,881 35,703
-------------------- --------------------
Total liabilities 14,703,942 16,684,215
-------------------- --------------------
Commitments and contingencies (See Notes)
STOCKHOLDERS' DEFICIT
Preferred Stock, 4,375,000 shares authorized, $.10 par
value, no shares issued and outstanding
Series A Convertible Preferred Stock, 625,000 shares authorized,
$.10 par value, 301,272 and 311,089 shares issued and
outstanding, respectively; liquidation preference: $1,506,360 30,127 31,109
Common Stock, no par value, 30,000,000 shares authorized,
10,024,901 and 9,065,486 shares issued and outstanding,
respectively 3,903,132 3,578,136
Additional paid-in capital 4,071,332 4,097,309
Accumulated deficit (11,415,839) (11,678,659)
Less: Deferred compensation (230,935) (115,334)
-------------------- --------------------
Total stockholders' deficit (3,642,183) (4,087,439)
-------------------- --------------------
Total liabilities and stockholders' deficit $ 11,061,759 $ 12,596,776
==================== ====================
See notes to financial statements.
04
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Six months ended June 30, Three months ended June 30,
2004 2003 2004 2003
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Commissions $23,751,638 $18,891,411 $10,239,260 $11,242,152
Principal transactions 5,052,148 5,503,426 2,076,337 3,242,096
Investment banking 2,070,446 363,415 798,558 168,087
Interest and other income 2,188,858 2,100,385 1,127,529 1,250,135
------------- ------------- ----------------- --------------
Total Revenue 33,063,090 26,858,637 14,241,684 15,902,470
------------- ------------- ----------------- --------------
Expenses:
Commissions, employee compensation and benefits 26,230,239 21,481,549 11,342,374 12,383,927
Clearing and floor brokerage 1,441,533 1,357,882 652,340 789,612
Communications and occupancy 1,384,844 1,374,148 706,163 680,569
Legal matters and related costs 1,782,004 2,845,120 500,061 2,444,054
Other operating expenses 1,801,439 1,533,193 935,643 904,032
Interest 160,211 77,557 80,257 39,744
------------- ------------- ----------------- --------------
Total Expenses 32,800,270 28,669,449 14,216,838 17,241,938
------------- ------------- ----------------- --------------
Net income (loss) $ 262,820 $(1,810,812) $ 24,846 $ (1,339,468)
============= ============= ================= ==============
Net income (loss) applicable to common stockholders $ 217,322 $(1,835,651) $ 2,251 $ (1,339,468)
============= ============= ================= ==============
Earnings (loss) per share:
Basic $ 0.02 $ (0.21) $ 0.00 $ (0.16)
Diluted $ 0.02 $ (0.21) $ 0.00 $ (0.16)
Weighted average number of shares of stock outstanding:
Basic 9,598,100 8,527,164 9,587,133 8,527,164
Diluted 16,048,897 8,527,164 9,738,345 8,527,164
See notes to financial statements.
05
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30,
2004 2003
(unaudited) (unaudited)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income (loss) $ 262,820 $(1,810,812)
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities:
Depreciation 260,495 260,077
Amortization 220,011 11,304
Loss on disposition of property and equipment 4,690 ---
Increase (decrease) in cash attributable to changes in assets
and liabilities:
Due from clearing firm 302,671 (555,193)
Securities owned (255,901) (306,049)
Loans receivable - officers --- 13,316
Employee and broker receivables 338,553 (62,072)
Other assets (379,105) (1,097,303)
Deferred income (437,504) (348,219)
Warrants subject to put options 38,499 ---
Securities sold, not yet purchased 211,979 412,288
Commissions payable (1,678,064) 2,046,111
Accounts payable 341,039 740,706
Accrued expenses (347,547) 668,570
Other liabilities (16,822) (21,774)
--------------- ----------------
Net cash (used in) operating activities (1,134,186) (49,050)
--------------- ----------------
Cash flows from investing activities:
Additions to property and equipment (128,223) (56,687)
--------------- ----------------
Net cash (used in) financing activities (128,223) (56,687)
--------------- ----------------
Cash flows from financing activities:
Payment of notes payable --- (48,057)
Payments of capital leases (91,853) (107,513)
Repurchase of common shares (21,162) ---
Proceeds from issuance of 6% convertible debentures --- 210,000
--------------- ----------------
Net cash (used in) provided by financing activities (113,015) 54,430
--------------- ----------------
Net (decrease) in cash and cash equivalents (1,375,424) (51,307)
Cash and cash equivalents at beginning of period 3,441,743 2,638,819
--------------- ----------------
Cash and cash equivalents at end of period $ 2,066,319 $ 2,587,512
=============== ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 144,989 $ 62,146
=============== ================
Income taxes $ 85,724 $ 20,170
=============== ================
Noncash financing activity:
Warrants charged to deferred financing costs in
connection with debenture offering $ --- $ 2,178
=============== ================
See notes to financial statements.
06
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - MANAGEMENT REPRESENTATION
The accompanying financial statements are unaudited for the
interim period, but include all adjustments (consisting only
of normal recurring accruals) which management considers
necessary to present fairly the financial position at June 30,
2004 and the results of operations and cash flows for all
periods presented. The preparation of financial statements in
conformity with GAAP requires the Company to make estimates
and assumptions that affect the reported amounts of revenues
and expenses during the reporting period. Actual results could
vary from these estimates. These financial statements should
be read in conjunction with the Company's Annual Report at,
and for the year ended December 31, 2003, as filed with the
Securities and Exchange Commission on Form 10-K.
The results reflected for the six-month and three-month
periods ended June 30, 2004, are not necessarily indicative of
the results for the entire fiscal year to end on December 31,
2004.
NOTE 2 - STOCK-BASED COMPENSATION
The Company periodically grants stock options to employees in
accordance with the provisions of its stock option plans, with
the exercise price of the stock options being set at the
closing market price of the common stock on the date of grant.
The Company accounts for stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and accordingly accounts for
employee stock-based compensation utilizing the intrinsic
value method. FAS No. 123, "Accounting for Stock-Based
Compensation", establishes a fair value based method of
accounting for stock-based compensation plans. The Company has
adopted the disclosure only alternative under FAS No. 123,
which requires disclosure of the pro forma effects on earnings
and earnings per share as if FAS No. 123 had been adopted as
well as certain other information.
Stock options granted to non-employees are recorded at their
fair value, as determined in accordance with FAS No. 123 and
Emerging Issues Task Force Consensus No. 96-18, and recognized
over the related service period. Deferred charges for options
granted to non-employees are periodically re-measured until
the options vest.
The following table illustrates the effect on net earnings and
EPS if the Company had applied the fair value recognition
provisions of FAS 123 to measure stock-based compensation
expense for outstanding stock option awards for the six and
three month periods ended June 30, 2004 and 2003:
Six months ended Three months ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) applicable to
common stockholders, as reported $217,322 (1,835,651) $ 2,251 $(1,339,468)
Deduct: Total stock based
compensation expense determined
under the fair value based method
for all awards, net of tax (105,723) (40,671) (42,418) (18,359)
--------- ------- ------- -------
Pro forma net income (loss) $111,599 $(1,876,322) $(40,167) $(1,357,827)
======= =========== ========= ===========
Income (loss) per share:
Basic - as reported $.02 $(0.21) $.00 $(.016)
Basic - pro forma .01 (0.22) .00 (.016)
Diluted - as reported .02 (0.21) .00 (.016)
Diluted - pro forma .01 (0.22) .00 (.016)
07
The fair value of the options issued is estimated on the date
of grant using the Black-Scholes Option Pricing Model with the
following weighted-average assumptions used for grants for the
six months ended June 30, 2004: Dividend yield of 0%; expected
volatility of 105%, risk free interest rate of 3.15%, and an
expected life of 4 years. The weighted average fair value of
options granted during the six and three months ended June 30,
2004 was $.20 and $.26, respectively.
NOTE 3 - ACCOUNTS PAYABLE
Accounts payable at June 30, 2004 includes two insurance
premium financing agreements with current balances of
approximately $569,367 and $71,390. The first agreement is
payable in four remaining installments of approximately
$144,000; the other agreement is payable in six remaining
installments of approximately $12,000. All installments
include interest at the rate of 4.4% per annum.
NOTE 4 - WARRANTS SUBJECT TO PUT OPTIONS
In July 2003, the Company issued 750,000 five-year warrants to
various plaintiffs as part of a legal settlement (See Note 7).
The warrants have been issued in three classes of 250,000
warrants each. Class A warrants have an exercise price of $.40
per share; Class B and Class C warrants have exercise prices
of $.25 per share. The settlement agreement provides that the
Company may be obligated to make additional cash payments of
up to $600,000 in the event that claimants elect to exercise
the warrants on certain dates. Specifically, if a majority of
then existing Class A warrant holders elected to exercise the
remaining warrants in their particular class during the month
of June 2004 (the "Required Exercise Event"), the claimants,
upon exercising their warrants, would be required to sell the
shares in the open market. If the warrants are exercised and
the shares sold, the Company would pay to the claimants up to
an aggregate amount of $200,000 less the amount received by
the claimants from the sale of their shares, net of
commissions. This process will be repeated for remaining Class
B and Class C warrant holders during the months of June 2005
and June 2006, respectively.
The Company will be required to redeem the warrants for $.80
per warrant in cash if the average market price of the
underlying common shares during the ten trading days
immediately preceding the date upon which the Company receives
notice that the warrant holders of a particular class have
elected to declare a Required Exercise Event is less than or
equal to the warrant exercise price. In the event that warrant
holders of a particular class elect not to declare a Required
Exercise Event, the Company's guarantee will be canceled with
respect to that class.
On June 30, 2004, the Company received notice from the
majority of the warrant holders electing to exercise all of
the Class A warrants. Pursuant to the terms of the Warrant
Agreement, because the market price was below the warrant
exercise price, the Company was required to redeem all of the
outstanding Class A warrants. Subsequent to the balance sheet
date, the Company paid $200,000 to the warrant holders for the
redemption of all of the Class A warrants.
In accordance with the provisions of FAS 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity," the Company has classified its
obligations under the warrants as liabilities in the Statement
of Financial Condition. The obligations embodied in the
warrants were initially valued at $441,016 using the
discounted cash flow method, and assuming that the Company
will be required to pay the full cash redemption cost of
$600,000. The Company will re-measure the value of the warrant
obligations as of the end of each reporting period using the
discounted cash flow method until the obligations are settled.
The recorded value at June 30, 2004 was $517,565. Changes in
value are recognized in earnings as interest expense.
08
NOTE 5 - SERIES A PREFERRED STOCK
During the quarter ended June 30, 2004, a total of 4,097
preferred shares were converted into 8,194 shares of common
stock.
During the quarter ended June 30, 2003, the Company suspended
the payment of cash dividends on its Series A Preferred stock.
New Jersey Business Corporation Act prohibits the payment of
any distribution by a corporation to, or for the benefit of
its shareholders, if the corporation's total assets are less
than its total liabilities. Unpaid preferred dividends will
continue to accumulate at 6% per annum. Arrearages must be
fully paid before any distribution can be declared or paid on
the Company's common stock. Cumulative dividends in arrears at
June 30, 2004 were approximately $121,000.
NOTE 6 - EMPLOYMENT AGREEMENTS
Effective in January 2004, the board named William Kurinsky
Chief Executive Officer, replacing Herb Kurinsky, who has
retained the office of Chairman. The board also named Victor
K. Kurylak President. In connection with these management
changes, the Company entered into new employment agreements
with the three executive officers. The agreements provide for
annual base salaries of $200,000, $300,000 and $250,000, for
the Chairman, CEO and President, respectively, customary
fringe benefits, severance, and participation in an executive
bonus pool and a corporate finance bonus pool. The agreements
have terms of three, five and two years, respectively, for
the Chairman, CEO and President, with a one-year extension
provision.
The agreements also provide for restricted stock and option
grants for the three executives. The Chairman and CEO have
each been granted 375,000 restricted shares of common stock
with vesting provisions. The President has been granted
250,000 restricted shares of common stock and 500,000 stock
options, each with vesting provisions.
The Company is amortizing the unvested shares over the
respective vesting periods. Amortization of deferred
compensation related to these shares was $189,583 and $94,762
for the six and three months ended June 30, 2004,
respectively.
NOTE 7 - LEGAL MATTERS
On July 17, 2003, the Company and its broker-dealer
subsidiary, First Montauk Securities Corp., entered into an
agreement with certain claimants in order to settle pending
arbitration proceedings. The litigation arose out of customer
purchases of certain high-yield corporate bonds that declined
in market value or defaulted. The settlement agreement covered
eleven separate claims, which sought an aggregate of
approximately $12.3 million in damages. The settlement
provided for the Company to pay an aggregate of $1,000,000
cash, and issued to the claimants 500,000 shares of the
Company's common stock valued at $160,000 based on the stock's
quoted market price. The Company also issued to the claimants
five-year warrants to purchase an aggregate of 750,000 common
shares (see Note 4).
The Company is a respondent or co-respondent in various legal
proceedings, which are related to its securities business.
Management is contesting these claims and believes that there
are meritorious defenses in each case. However, litigation is
subject to many uncertainties, and some of these actions and
proceedings may result in adverse judgments. Further, the
availability of insurance coverage is determined on a
case-by-case basis by the insurance carrier, and is limited to
the coverage limits within the policy for any individual claim
and in the aggregate. After considering all relevant facts,
available insurance coverage and consultation with litigation
counsel, management believes that significant judgments or
other unfavorable outcomes from pending litigation could have
a material adverse impact on the Company's consolidated
financial condition, results of operations, and cash flows in
any particular quarterly or annual period, or in the
aggregate, and could impair the Company's ability to meet the
statutory net capital requirements of its securities business.
09
During the quarter, the Company settled, or otherwise
resolved, arbitrations and lawsuits that required the payment
of $961,000, a portion of which was accrued for in prior
quarters. As of June 30, 2004, the Company has accrued
litigation costs that are probable and can be reasonably
estimated based on a review of existing claims, arbitrations
and unpaid settlements. Management cannot give assurance that
this amount will be adequate to cover actual costs that may be
subsequently incurred. Further, it is not possible to predict
the outcome of other matters pending against the Company. All
such cases will continue to be vigorously defended.
NOTE 8 - EARNINGS PER SHARE
Basic earnings per share for the six and three months ended
June 30, 2004 and 2003 is based on the weighted average number
of shares of common stock outstanding. Diluted earnings per
share for the six and three months ended June 30, 2004 is
based on the weighted average number of shares of common stock
and dilutive securities outstanding.
The following table sets forth the weighted average number of
shares of common stock and dilutive securities outstanding
used in the computation of basic and diluted earnings per
share:
Six months ended Three months ended
June 30 June 30
2004 2003 2004 2003
---- ---- ---- ----
Numerator - basic:
Net income (loss) $ 262,820 $(1,810,812) $ 24,846 $(1,339,468)
Deduct: preferred stock
dividends (45,498) (24,839) (22,595) --
-------- --------- ------- -----------
Numerator for basic
earnings per share $ 217,322 $(1,835,651) $ 2,251 $ (1,339,468)
======= =========== ====== ===========
Numerator - diluted:
Numerator for basic
earnings per share $ 217,322 $(1,835,651) $ 2,251 $ (1,339,468)
Add: convertible debenture
interest, net of tax 95,096 -- -- --
---------- ----------- -------- ------------
Numerator for diluted $ 312,418 $(1,835,651) $ 2,251 $ (1,339,468)
========= =========== ======== ============
earnings per share
Denominator:
Weighted average common
shares outstanding 9,598,100 8,527,164 9,587,133 8,527,164
Effect of dilutive securities:
Stock options and warrants 180,797 -- 151,212 --
Restricted shares -- -- -- --
Convertible debentures 6,270,000 -- -- --
--------- ---------- ---------- -------------
Denominator for diluted
earnings per share 16,048,897 8,527,164 9,738,345 8,527,164
========== ========= ========= =========
10
Potential common shares are excluded from the dilutive per
share computation for the six and three months ended June 30,
2003 due to operating losses. The following securities have
been excluded from the dilutive per share computation for the
six and three months ended June 30, 2004, as they are
antidilutive:
Six months ended Three months ended
June 30, 2004 June 30, 2004
------------- -------------
Stock options 3,798,998 3,798,998
Warrants 3,410,946 3,410,946
Convertible debt -- 6,270,000
Convertible preferred stock 602,544 602,544
Restricted shares 458,322 458,322
NOTE 9 - REPURCHASE OF COMMON SHARES
During the period, the Company repurchased 60,217 unregistered
shares of its common stock from various parties who had
received the shares in a legal settlement. The Company paid
$.35 per share, plus interest, or $21,162 in total. In
accordance with the New Jersey Business Corporation Act, these
shares have been effectively cancelled as of the balance sheet
date.
NOTE 10 - SUBSEQUENT EVENT
In August 2004, the Company redeemed all 250,000 Class A
warrants issued in July 2003 in connection with a legal
settlement. The Company paid $200,000 to various
warrantholders for the redemption.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Factors Affecting "Forward-Looking Statements"
From time to time, we may publish "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended, or make oral
statements that constitute forward-looking statements. These forward-looking
statements may relate to such matters as anticipated financial performance,
future revenues or earnings, business prospects, projected ventures, new
products, anticipated market performance, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, we caution readers that a variety of factors could cause our actual
results to differ materially from the anticipated results or other expectations
expressed in our forward-looking statements. These risks and uncertainties, many
of which are beyond our control, include, but are not limited to: (i)
transaction volume in the securities markets, (ii) the volatility of the
securities markets, (iii) fluctuations in interest rates, (iv) changes in
regulatory requirements which could affect the cost of doing business, (v)
fluctuations in currency rates, (vi) general economic conditions, both domestic
and international, (vii) changes in the rate of inflation and related impact on
securities markets, (viii) competition from existing financial institutions and
other new participants in competition from existing financial institutions and
other new participants in the securities markets, (ix) legal developments
affecting the litigation experience of the securities industry, and (x) changes
in federal and state tax laws which could affect the popularity of products sold
by us. We do not undertake any obligation to publicly update or revise any
forward-looking statements. The reader is referred to our previous filings with
the Commission, including our Form 10-K for the year ended December 31, 2003 and
our other periodic reports as filed with the Commission.
Overview
We are a New Jersey-based financial services holding company whose
principal subsidiary, First Montauk Securities Corp., has operated as a full
service retail and institutional securities brokerage firm since 1987. Since
July 2000, First Montauk Securities Corp. has operated under the trade name
"Montauk Financial Group" and provides a broad range of securities brokerage and
investment services to a diverse retail and institutional clientele, as well as
corporate finance and investment banking services to corporations and
businesses. In 1997, Montauk Financial Group established Century Discount
Investments, a discount brokerage division. We also sell insurance products
through our subsidiary, Montauk Insurance Services, Inc.
Montauk Financial Group has approximately 413 registered representatives
and services over 61,000 retail and institutional customers. With the exception
of two corporate-leased branch offices, all of our other 153 branch office and
satellite locations in 29 states are owned and operated by affiliates;
independent owners who maintain all appropriate licenses and are responsible for
all office overhead and expenses. Montauk Financial Group also employs
registered representatives directly at its corporate office and one of its two
company-leased branch offices.
Montauk Financial Group is registered as a broker-dealer with the
Securities and Exchange Commission, the National Association of Securities
Dealers Regulation, Inc., the Municipal Securities Rule Making Board, and the
Securities Investor Protection Corporation and is licensed to conduct its
brokerage activities in all 50 states, the District of Columbia, and the
Commonwealth of Puerto Rico. All securities transactions are cleared through
Fiserv Securities, Inc. of Philadelphia, PA, with various floor brokerage and
specialist firms providing execution services. These arrangements provide
Montauk Financial Group with back office support, transaction processing
services on all principal, national and international securities exchanges, and
access to other financial services and products.
12
Results of Operations
Three and Six Months Ended June 30, 2004 Compared to Three and Six Months
Ended June 30, 2003
The results of operations for the three months ended June 30, 2004, (the
"2004 quarter"), showed a 10% decrease in revenues over the same quarter in the
prior year (the "2003 quarter"), decreasing to $14,242,000, from $15,902,000 in
the 2003 quarter. Our revenues and operating results are influenced by general
economic and market conditions, particularly conditions in the equity market.
Uncertainty about interest rates, the upcoming election and the continued threat
of terrorism have all contributed to the lack of investor confidence in the
markets and reduced overall volume. For the 2004 quarter, we reported net income
applicable to common stockholders of $2,251, or $0.00 per basic and diluted
share, as compared to a net loss applicable to common stockholders reported in
the 2003 quarter, of $1,339,000, or ($0.16) per basic and diluted share.
The results of operations for the six months ended June 30, 2004, (the
"2004 period"), showed a 23% increase in revenues over the same period in the
prior year (the "2003 period"), increasing to $33,063,000, from $26,859,000 in
the 2003 period. For the 2004 period, we reported net income applicable to
common stockholders of $217,322, or $.02 per basic and diluted share, as
compared to a net loss applicable to common stockholder reported in the 2003
period, of $1,835,651, or ($0.21) per basic and diluted share.
The primary source of our revenue is commissions generated from securities
transactions, mutual funds, insurance products and fees from managed accounts.
Total revenues from commissions decreased $1,003,000, or 9%, to $10,239,000 for
the 2004 quarter, from $11,242,000 for the 2003 quarter, but increased 26% for
the 2004 period, to $23,752,000 from $18,891,000, when compared to the 2003
period.
Revenues from agency securities transactions, which consist primarily of
equity and option transactions, decreased $828,000, or 11%, from $7,449,000 in
the 2003 quarter to $6,621,000 in the 2004 quarter. Agency commissions, as a
percentage of total revenues, remained constant at 47%. For the first six months
of 2004, agency commissions were $16,102,000, as compared to $12,287,000, for
the same period in 2003, an increase of 31%. Agency commissions, as a percentage
of total revenues, increased to 49% from 46% when comparing these two periods.
Fees generated from managed accounts have continued to increase. Fee-based
revenues increased to $681,000 for the 2004 quarter and $1,304,000 for the 2004
period, an increase of approximately 57% and 53%, respectively, when compared to
the same periods in 2003. As more of our financial professionals move investor
capital from commission based transactional business to fees based on a
percentage of asset value, this segment of our business will continue to grow.
Total revenues from principal transactions, which include
mark-ups/mark-downs on transactions in which we act as principal, proprietary
trading, and the sale of fixed income securities, decreased $1,166,000, or 36%,
from $3,242,000 for the 2003 quarter to $2,076,000 for the 2004 quarter. For the
2004 period, this same category decreased from $5,503,000 in the 2003 period, to
$5,052,000 in the 2004 period, a decrease of 8%.
Investment banking revenues for the 2004 quarter increased from $168,000 in
the 2003 quarter, to $798,000 in the 2004 quarter, an increase of 375%. Revenues
for the 2004 period were $2,070,000, an increase of $1,707,000, or 470% over the
2003 period. This category includes new issues of equity and preferred stock
offerings in which we participated as a selling group or syndicate member, and
private offerings of securities in which we acted as placement agent. We have
benefited by the resurgence of investment banking deals by completing several
private offerings during the three and six month periods.
Interest and other income for the 2004 quarter totaled $1,128,000, as
compared to $1,250,000 for the 2003 quarter, and $2,189,000 versus $2,100,000
for the 2004 and 2003 periods, respectively. Interest income increased 11%, or
$70,000, in 2004, when compared to the 2003 quarter and 16%, or $199,000, when
compared to the 2003 period. Other income decreased $192,000 for the 2004
quarter and $110,000 for the 2004 period when compared to the same periods in
2003 and was primarily related to the decrease in recovery of bad debt
write-offs, offset by the increase in recognition of deferred income. Cash
advances that were received from our clearing firm, Fiserv Securities, Inc., are
deferred and amortized on a straight-line basis over the remaining contract
term. Other income included amortization of deferred revenue of approximately
$219,000 and $174,000 in the 2004 and 2003 quarters, respectively and $437,000
and $348,000 in the 2004 and 2003 periods, respectively.
13
Total expenses decreased by $3,025,000, or 18%, to $14,217,000 in the 2004
quarter. For the 2004 period, total expenses increased by 14%, to $32,800,000,
from $28,669,000 in the 2003 period. Compensation and benefits expense for
management, operations and clerical personnel increased for the 2004 quarter, to
$1,781,000 (12% of revenues) from $1,645,000 (10% of revenues), an increase of
$136,000 over the 2003 quarter. Included in this category are salaries, option
compensation, health insurance premiums, payroll taxes and 401(k) contribution
accruals. For the 2004 quarter, the increase was primarily attributable to the
amortization of deferred stock compensation. For the 2004 period, this same
category of expense was $3,700,000, compared to $3,276,000 for the 2003 period.
Amortization of deferred stock compensation and severance payments accounted for
the largest portion of the increase between the two periods.
Commission expense, consistently the largest expense category, which is
directly related to commission revenue, decreased 11%, or $1,177,000, from
$10,738,000 for the 2003 quarter to $9,561,000 for the 2004 quarter. Commission
expense for the 2004 period increased to $22,530,000, from $18,206,000 in the
2003 period, an increase of $4,324,000, or 24%.
Clearing and floor brokerage costs which are determined by the volume and
type of transactions, decreased $138,000, to $652,000 for the 2004 quarter, from
$790,000 for the 2003 quarter. For the 2004 period these costs increased
$84,000, to $1,442,000, from the 2003 period costs of $1,358,000. Clearing
costs, as a percentage of gross revenues, can fluctuate on an interim basis
depending upon the product mix.
Communications and occupancy costs increased during the 2004 quarter, from
$681,000 in the 2003 quarter to $706,000 in the 2004 quarter. For the six months
ended June 30, 2004, these costs increased slightly to $1,385,000 from
$1,374,000 for the same period in 2003. The increase in communication and
occupancy costs for both periods was primarily related to increases in equipment
rental and market data services.
The expense area that has decreased most dramatically in 2004 to date was
costs related to legal matters and settlements. These costs decreased by
$1,944,000, to $500,000 during the 2004 quarter, from $2,444,000 for the same
quarter in 2003. For the six month period of 2004, the decrease was $1,063,000
compared to the same six month period in 2003. In 2004, we implemented new
procedures related to the analysis, management and resolution of our outstanding
claims and control over outside legal costs.
We are a respondent or co-respondent in various legal proceedings that are
related to our securities business. We are contesting these claims and believe
that there are meritorious defenses in each case. However, litigation is subject
to many uncertainties, and some of these actions and proceedings may result in
adverse judgments. Further, the availability of insurance coverage is determined
on a case-by-case basis by the insurance carrier, and is limited to the coverage
limits within the policy for any individual claim and in the aggregate. After
considering all relevant facts, available insurance coverage and consultation
with litigation counsel, we believe that significant judgments or other
unfavorable outcomes from pending litigation could have a material adverse
impact on our consolidated financial condition, results of operations, and cash
flows in any particular quarterly or annual quarter, or in the aggregate, and
could impair our ability to meet the statutory net capital requirements of our
securities business.
As of June 30, 2004, we have accrued litigation costs that are probable and
can be reasonably estimated based on a review with outside counsel of existing
claims, arbitrations and unpaid settlements. We cannot give assurance that this
amount will be adequate to cover actual costs that may be subsequently incurred.
Further, it is not possible to predict the outcome of claims pending against us.
14
Other operating costs increased $32,000, to $936,000 in the 2004 quarter,
from $904,000 in the 2003 quarter. For the six month period ending June 30, 2004
and 2003, these expenses were $1,801,000 and $1,533,000, respectively, an
increase of $268,000. This increase was primarily attributable to a substantial
increase in our errors and omission insurance premiums under our initial renewal
policy that became effective in February 2003.
Liquidity and Capital Resources
We maintain a highly liquid balance sheet with approximately 67% of our
assets consisting of cash, securities owned, and receivables from our clearing
firm and other broker-dealers. The balances in these accounts can and do
fluctuate significantly from day to day, depending on general economic and
market conditions, volume of activity, and investment opportunities. These
accounts are monitored on a daily basis in order to ensure compliance with
regulatory capital requirements and to preserve liquidity. Overall, cash and
cash equivalents decreased during the period by $1,375,000. Net cash required by
operating activities during the 2004 period was $1,134,000, as a result of the
net income of $263,000, adjusted by non-cash charges including depreciation and
amortization of $480,000, increases in securities sold of $212,000 and warrants
subject to put options of $38,000 and decreases in the amount owed from our
clearing firm and employee and broker receivables of $303,000 and $338,000,
respectively. These increases in cash were offset by increases in securities
owned of $256,000, other assets of $379,000 and decreases in commissions'
payable and deferred income of $1,678,000 and $437,000, respectively.
As of June 30, 2004, we have accrued litigation costs that are probable and
can be reasonably estimated based on a review of existing claims, arbitrations
and unpaid settlements. Management cannot give assurance that this amount will
be adequate to cover actual costs that may be subsequently incurred. Further, it
is not possible to predict the outcome of other matters pending against us. We
will continue to vigorously defend against these matters.
Additions to capital expenditures accounted for the entire use of cash from
investing activities of $128,000 during the first six months of 2004. We
anticipate additions to capital expenditures for the remaining six months of
2004 to be about $150,000.
Financing activities consumed cash of $113,000 for the 2004 period.
Payments of capital leases were $92,000. In addition, during the period, we
repurchased 60,217 unregistered shares of our common stock from various parties
who had received the shares in a legal settlement for $21,162, including
interest.
In connection with a settlement agreement, we issued 750,000 five-year
warrants in three classes of 250,000 warrants each, with varying exercise
prices. The settlement agreement provides that we may be obligated to make
additional cash payments of up to $600,000 in the event that claimants elect to
exercise the warrants on certain dates. Specifically, we would be required to
redeem the warrants for $.80 per warrant in cash if the average market price of
the underlying common shares during the ten trading days immediately preceding
the date upon which we receive notice that the warrant holders of a particular
class have elected to declare a Required Exercise Event is less than or equal to
the warrant exercise price. On June 30, 2004, we received notice from the
majority of the warrant holders electing to exercise all of the Class A
warrants. Pursuant to the terms of the Warrant Agreement, because the market
price was below the warrant exercise price, we were required to redeem all of
the outstanding Class A warrants. In August 2004, we paid $200,000 to the
warrant holders for the redemption of all of the Class A warrants. This same
potential financial obligation will continue for the remaining Class B and Class
C warrant holders during the months of June 2005 and June 2006, respectively.
Premium financing agreements for the renewal of two of our insurance
policies had balances at June 30, 2004 of approximately $569,000 and $71,000.
The first agreement is payable in four remaining installments of approximately
$144,000; the other agreement is payable in six remaining installments of
approximately $12,000. All installments include interest at the rate of 4.4% per
annum.
15
Consolidated Contractual Obligations and Lease Commitments
The tables below summarize information about the consolidated contractual
obligations as of June 30, 2004 and the effects these obligations are expected
to have on our consolidated liquidity and cash flows in future years. These
tables do not include any projected payment amounts related to our potential
exposure to arbitrations and other legal matters.
As of June 30, 2004
Expected Maturity Date
- ------------------------ -------------- ------------- ------------- ----------- ------------ ------------ ---------------
Category 2004 2005 2006 2007 2008 After 2008 Total
- ------------------------ ------------- ------------- ------------- ----------- ------------ ------------ ---------------
- ------------------------ ------------- ------------- ------------- ----------- ------------ ------------ ---------------
- ------------------------ ------------- ------------- ------------- ----------- ------------ ------------- ---------------
- ------------------------ ------------- ------------- ------------- ----------- ------------ ------------- ---------------
Debt Obligations 0 0 0 $1,030,000 $2,105,000 0 $3,135,000
- ------------------------ ------------- ------------- ------------- ----------- ------------ ------------- ---------------
- ------------------------ ------------- ------------- ------------- ----------- ------------ ------------- ---------------
Capital Lease $ 23,568 $ 15,712 0 0 0 0 $ 39,280
Obligations
- ------------------------ ------------- ------------- ------------- --- ------- ------------ ------------- ---------------
- ------------------------ ------------- ------------- ------------- ----------- ------------ ------------- ---------------
Operating Lease $ 798,000 $ 296,302 $169,500 0 0 0 $1,263,802
Obligations
- ------------------------ ------------- ------------- --- --------- ----------- ------------ ------------- ---------------
- ------------------------ ------------- ------------- --- --------- ----------- ------------ ------------- ---------------
Purchase Obligations 0 0 0 0 0 0 0
- ------------------------ ------------- ------------- ------------- ---- ------ ------------ ------------- ---------------
- ------------------------ ------------- ------------- ------------- --- ------- ------------ ------------- ---------------
Other Long-Term $ 437,504(2) $ 200,000(1) $200,000(1) $875,000(2) $875,000(2) $1,605,116(2) $ 400,000(1)
Obligations Reflected $ 875,000(2) $875,000(2) $5,542,620(2)
on Balance Sheet under
GAAP
- ------------------------ ------------- ------------- ------------- ----------- ------------ ------------- ---------------
- ------------------------ ------------- ------------- ------------- ----------- ------------ ------------- ---------------
- ------------------------ ------------ ------------- ------------- ----------- ------------ ------------- ---------------
- ------------------------ ------------ ------------- ------------- ----------- ------------ ------------- ---------------
Total $1,752,397 $1,416,926 $1,244,500 $1,905,000 $2,980,000 $1,605,116 $10,903,939
- ------------------------ ------------ ------------- ------------- ----------- ------------ ------------- ---------------
(1) Expected payment obligations embodied in the warrants subject to put
options. For more detailed information please refer to Note 4 of the
consolidated financial statements.
(2) We are obligated to repay any unearned portion of payments received from our
clearing firm in connection with the financing agreement entered into in
November 2000, in the event we fail to achieve certain minimum performance
criteria by the end of the agreement, or terminate the agreement under certain
circumstances prior to expiration.
Net Capital
At June 30, 2004, Montauk Financial Group had net capital of $1,286,917,
which was $960,616 in excess of its required net capital of $326,301, and the
ratio of aggregate indebtedness to net capital was 3.8 to 1.
Series A Preferred Stock
In 1999, we issued 349,511 shares of Series A Convertible Preferred Stock
in an exchange offering related to a settlement with holders of certain leases.
Each share of the Preferred Stock is convertible into two shares of Common Stock
and pays a quarterly dividend of 6%. Quarterly dividends were paid through the
first quarter of 2003, at which time we suspended the dividend payments in
accordance with applicable state law. (See Note 5 to the consolidated financial
statements).
During the quarter, a total of 4,097 preferred shares were converted into
8,194 shares of common stock. As of June 30, 2004, we have 301,272 Series A
Preferred shares issued and outstanding. The accrued cumulative dividends not
yet declared as of June 30, 2004, is approximately $121,000.
16
Application of Critical Accounting Policies
Generally accepted accounting principles are complex and require management
to apply significant judgments to various accounting, reporting and disclosure
matters. Our management must use assumptions and estimates to apply these
principles where actual measurement is not possible or practical.
For a complete discussion of our significant accounting policies, which
management does not feel has changed during the six month period ended June 30,
2004, see "Management Discussion and Analysis" and "Notes to the Consolidated
Financial Statements" in our 2003 Annual Report filed on Form 10-K. Certain
policies are considered critical because they are highly dependent upon
subjective or complex judgments, assumptions and estimates. Changes in such
estimates may have a significant impact on the financial statements.
Off-Balance Sheet Arrangements
We execute securities transactions on behalf of our customers. If either
the customer or a counter-party fail to perform, we, by agreement with our
clearing broker may be required to discharge the obligations of the
non-performing party. In such circumstances, we may sustain a loss if the market
value of the security is different from the contract value of the transaction.
We seek to control off-balance-sheet risk by monitoring the market value of
securities held or given as collateral in compliance with regulatory and
internal guidelines. Pursuant to such guidelines, our clearing firm requires
additional collateral or reduction of positions, when necessary. We also
complete credit evaluations where there is thought to be credit risk.
Item 3. Risk Management
Risk is an inherent part of our business and activities. The extent to
which we properly and effectively identify, assess, monitor and manage the
various types of risk involved in our activities is critical to our soundness
and profitability. We seek to identify, assess, monitor and manage the following
principal risks involved in our business activities: market, credit, operational
and legal. Senior management takes an active role in the risk management process
and requires specific administrative and business functions to assist in the
identification, assessment and control of various risks. Our risk management
policies and procedures are subject to ongoing review and modification.
Market Risk. Certain of our business activities expose us to market risk.
This market risk represents the potential for loss that may result from a change
in value of a financial instrument as a result of fluctuations in interest
rates, prices or changes in credit rating of issuers of debt securities.
This risk relates to financial instruments we hold as investment and for
trading. Securities inventories are exposed to risk of loss in the event of
unfavorable price movements. Securities positions are marked to market on a
daily basis. Market-making activities are client-driven, with the objective of
meeting clients' needs while earning a positive spread. At June 30, 2004 and
December 31, 2003, the balances of our securities positions owned and sold, not
yet purchased were approximately $425,000 and $281,000, and $170,000 and
$69,000, respectively. In our view, the potential exposure to market risk,
trading volatility and the liquidity of securities held in the firm's inventory
accounts could potentially have a material effect on its financial position.
Credit Risk. Credit risk represents the loss that we would incur if a
client, counterparty or issuer of securities or other instruments that we hold
fails to perform its contractual obligations. Client activities involve the
execution, settlement, and financing of various transactions on behalf of its
clients. Client activities are transacted on either a cash or margin basis.
Client activities may expose us to off-balance sheet credit risk. We may have to
purchase or sell financial instruments at the prevailing market price in the
event of the failure of a client to settle a trade on its original terms or in
the event that cash and securities in the client margin accounts are not
sufficient to fully cover the client losses. We seek to control the risks
associated with client activities by requiring clients to maintain collateral in
compliance with various regulations and company policies.
Operational Risk. Operational risk generally refers to the risk of loss
resulting from our operations, including, but not limited to, improper or
unauthorized execution and processing of transactions, deficiencies in our
operating systems, business disruptions and inadequacies or breaches in our
internal control processes. We operate in diverse markets and rely on the
ability of our employees and systems to process high numbers of transactions
often within short time frames. In the event of a breakdown or improper
operation of systems, human error or improper action by employees, we could
suffer financial loss, regulatory sanctions or damage to our reputation. In
order to mitigate and control operational risk, we have developed and continue
to enhance policies and procedures that are designed to identify and manage
operational risk at appropriate levels. Included in our operational risk
management practice is disaster recovery for our critical systems. We believe
that our disaster recovery program, including off-site back-up technology and
operational facilities, is adequate to handle a reasonable business disruption.
However, there can be no assurances that a disaster directly affecting our
headquarters or operations center would not have a material adverse impact.
Insurance and other safeguards might only partially reimburse us for our losses.
17
Legal Risk. Legal risk includes the risk of non-compliance with applicable
legal and regulatory requirements. We are subject to extensive regulation in the
different jurisdictions in which we conduct our business. We have various
procedures addressing issues such as regulatory capital requirements, sales and
trading practices, use of and safekeeping of customer funds, credit granting,
collection activities, anti money-laundering and record keeping. In addition,
our legal risk includes substantial risks of liability arising from litigation
and arbitration. As an underwriter, a broker-dealer and an investment adviser,
we may be exposed to substantial liability under federal and state securities
and other laws, including those relating to underwriters' liability in
securities offerings. Further, broker-dealers and asset managers may also be
held liable by customers and clients for losses sustained on investments if it
is found that they caused such losses.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we evaluated, under the
supervision and with the participation of our management, including our chief
executive officer and the chief financial officer, the effectiveness of the
design and operation of our "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934, Rules 13a - 15(e) and 15d - 15(e)). Based
on this evaluation our management, including our chief executive officer and
chief financial officer, have concluded that as of the date of the evaluation
our disclosure controls and procedures were effective to ensure that all
material information required to be filed in this report has been made known to
them.
Changes in Internal Controls
There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the Evaluation Date set forth above.
18
PART II
OTHER INFORMATION
Item 1. Legal proceedings
The Company is a respondent or co-respondent in various legal proceedings,
which are related to its securities business. Management is contesting these
claims and believes that there are meritorious defenses in each case. However,
litigation is subject to many uncertainties, and some of these actions and
proceedings may result in adverse judgments. Further, the availability of
insurance coverage is determined on a case-by-case basis by the insurance
carrier, and is limited to the coverage limits within the policy for any
individual claim and in the aggregate. After considering all relevant facts,
available insurance coverage and consultation with litigation counsel,
management believes that significant judgments or other unfavorable outcomes
from pending litigation could have a material adverse impact on the Company's
consolidated financial condition, results of operations, and cash flows in any
particular quarterly or annual period, or in the aggregate, and could impair the
Company's ability to meet the statutory net capital requirements of its
securities business.
During the quarter, the Company settled, or otherwise resolved,
arbitrations and lawsuits that required the payment of $961,000, a portion of
which was accrued for in prior quarters. As of June 30, 2004, the Company has
accrued litigation costs that are probable and can be reasonably estimated based
on a review of existing claims, arbitrations and unpaid settlements. Management
cannot give assurance that this amount will be adequate to cover actual costs
that may be subsequently incurred. Further, it is not possible to predict the
outcome of other matters pending against the Company. All such cases will
continue to be vigorously defended.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities.
(a) Not applicable.
(b) Not applicable.
(c) During the quarter ended June 30, 2004, we did not sell any equity
securities that were not registered under the Securities Act of 1933, as
amended.
(d) Not applicable.
(e) During the quarter ended June 30, 2004, the Company purchased the following
equity securities:
- -------------------- ------------------ -------------------- ------------------------- -------------------------------
(c) Total Number of (d) Maximum Number (or
(a) Total Shares Purchased as Approximate Dollar Value)
Number of (b) Average Part of Publicly of Shares that May Yet Be
Shares Price Paid per Announced Plans or Purchased Under the Plans
Purchased Share Programs or Programs
- -------------------- ------------------ -------------------- ------------------------- -------------------------------
- -------------------- ------------------ -------------------- ------------------------- -------------------------------
April 1, 2004 56,905(1) $.35 0 N/A
through April 30,
2004
- -------------------- ------------------ -------------------- ------------------------- -------------------------------
- -------------------- ------------------ -------------------- ------------------------- -------------------------------
May 1, 2004 0 0 0 N/A
through May 31,
2004
- -------------------- ------------------ -------------------- ------------------------- -------------------------------
- -------------------- ------------------ -------------------- ------------------------- -------------------------------
June 1, 2004 3,312(1) $.35 0 N/A
through June 30,
2004
- -------------------- ------------------ -------------------- ------------------------- -------------------------------
- -------------------- ------------------ -------------------- ------------------------- -------------------------------
Total
- -------------------- ------------------ -------------------- ------------------------- -------------------------------
(1) Represents our repurchase of 60,217 shares of common stock, which was not
part of a publicly announced plan or program. Does not include our redemption of
250,000 Class A Warrants, as described in the "Liquidity and Capital Resources"
section of Item 2 of Part I of this Quarterly Report on Form 10-Q, which event
occurred subsequent to end of the fiscal quarter covered by this report.
19
Item 3. Defaults Upon Senior Securities:
None.
Item 4. Submission of Matters to a Vote of Securities Holders:
We held our Annual Meeting of shareholders on June 25, 2004. As of the
record date of May 14, 2004, there were 10,076,926 shares outstanding and
eligible to vote at the Annual Meeting. A total of 8,328,501 shares of our
common stock were present or represented by proxy at the meeting. At the Annual
Meeting, shareholders were requested to vote on the election of the following
two Class II Directors, both of whom were re-elected as Class II Directors by
the shareholders for a three year term:
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Name of Nominee Votes Cast In Favor Votes Withheld % In Favor
--------------- ------------------- -------------- ----------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Norma Doxey 8,222,567 57,608 98.73
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Barry D. Shapiro 8,217,067 38,608 98.66
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Herbert Kurinsky, William J. Kurinsky and Ward R. Jones, Jr. all continue as
directors of First Montauk.
Item 5. Other Information.
The Company has declared and paid dividends on its Series A Preferred Stock
at the rate of 6% per annum on a quarterly basis since the third quarter of
1999. Since the second quarter of 2003, the Company has been unable to continue
to pay such dividends pursuant to the New Jersey Business Corporation Act. The
New Jersey Business Corporation Act prohibits a corporation from paying
dividends if its total assets would be less than its total liabilities.
Dividends will continue to accumulate on the outstanding shares of Series A
Preferred Stock and will be paid when the Company is legally authorized to do so
under the New Jersey Business Corporation Act.
20
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
The exhibits designated with an asterisk (*) are filed herewith. All other
exhibits have been previously filed with the Commission and, pursuant 17 C.F.R.
ss. 230.411, are incorporated by reference to the document referenced in
brackets following the description of such exhibits.
- ----------------- ----------------------------------------------------------------------------------------------------
*31.1 Certification of President and Chief Operating Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
- ----------------- ----------------------------------------------------------------------------------------------------
*31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
- ----------------- ----------------------------------------------------------------------------------------------------
*32.1 Certification of President and Chief Operating Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
- ----------------- ----------------------------------------------------------------------------------------------------
*32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
(b) Reports on Form 8-K
During the quarter ended June 30, 2004 we filed the following reports on Form
8-K:
- --------------------------- ----------- -----------------------------------------------------------------------
Date of Report Item(s) Description
- --------------------------- ----------- -----------------------------------------------------------------------
- --------------------------- ----------- -----------------------------------------------------------------------
April 2, 2004 7, 12 Announcement of fiscal year end financial information, including
related press release.
- --------------------------- ----------- -----------------------------------------------------------------------
May 20, 2004 7, 12 Announcement of quarterly financial information, including related
press release.
- --------------------------- ----------- -----------------------------------------------------------------------
- --------------------------- ----------- -----------------------------------------------------------------------
- --------------------------- ----------- -----------------------------------------------------------------------
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST MONTAUK FINANCIAL CORP.
(Registrant)
Dated: August 16, 2004 /s/ William J. Kurinsky
--------------------------------
William J. Kurinsky
Secretary/Treasurer
Chief Financial Officer and
Principal Accounting Officer
/s/ Victor K. Kurylak
--------------------------------
Victor K. Kurylak
President
22
Exhibit 31.1
CERTIFICATION
I, Victor K. Kurylak, President, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Montauk
Financial Corp.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the quarter
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the quarters presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the quarter in which this report is being prepared;
b) (Not applicable).
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the quarter covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 16, 2004
/s/ Victor K. Kurylak
- --------------------------------------------
VICTOR K. KURYLAK
PRESIDENT
23
Exhibit 31.2
CERTIFICATION
I, William J. Kurinsky, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Montauk
Financial Corp.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the quarter
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the quarters presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the quarter in which this report is being prepared;
b) (Not applicable).
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the quarter covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 16, 2004
/s/ William J. Kurinsky
- --------------------------------------------
WILLIAM J. KURINSKY
CHIEF FINANCIAL OFFICER
24
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of FIRST MONTAUK FINANCIAL
CORP. (the "Company") on Form 10-Q for the quarter ending June 30, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Victor K. Kurylak, President and Chief Operating Officer of the Company,
certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
/s/ Victor K. Kurylak
- -------------------------------------
Victor K. Kurylak
President and Chief Operating Officer
August 16, 2004
25
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of FIRST MONTAUK FINANCIAL
CORP. (the "Company") on Form 10-Q for the quarter ending June 30, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, William J. Kurinsky, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
/s/ William J. Kurinsky
- -------------------------------------
William J. Kurinsky
Chief Financial Officer
August 16, 2004